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Sept. 9 — In a novel ruling, the Delaware Court of Chancery Sept. 8 concluded that the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-company disputes.

In so ruling, Chancellor Andre G. Bouchard dismissed a lawsuit by the city of Providence challenging a bylaw adopted by First Citizens BancShares Inc. that designated the U.S. District Court for the Eastern District of North Carolina or North Carolina state courts as the forum in which to resolve actions against the company and its directors.

Applying the bylaw, the court also found that the city's class and derivative claims alleging that FC BancShares's board breached its fiduciary duty by entering into a merger agreement to acquire another bank holding company must be litigated in the North Carolina federal district court.

Bylaw Adopted

FC BancShares is a bank holding company incorporated in Delaware. On the same day that it adopted the forum selection bylaw, the company entered into a merger agreement to acquire First Citizens Bancorporation Inc., a bank holding company incorporated in South Carolina.

The city of Providence, a BancShares shareholder, alleged in a complaint filed in June that the forum selection bylaw was invalid as a matter of state law or public policy. In a separate complaint filed in July, the city alleged that FC BancShares's majority shareholders forced the company to overpay for FC Bancorporation to their benefit and to the detriment of minority shareholders.

‘Boilermakers' Controlling

In dismissing the city's complaints, the court found that FC BancShares's forum selection bylaw was validated by the analysis outlined in Boilermakers Local 154 Retirement Fund v. Chevron Corp.

In Boilermakers, then-Chancellor Leo E. Strine Jr. upheld a Chevron bylaw providing that litigation relating to the company's internal affairs should be conducted in Delaware.

The fact that BancShares had selected North Carolina's federal and state courts as the exclusive forum rather than Delaware did not call into question the bylaw's facial validity, the court held in the instant case.

The court also rejected the city's argument that the board breached its fiduciary duty in adopting the bylaw. “Providence has failed to rebut the presumption of the business judgment standard of review that attaches to the Board's adoption of the Forum Selection Bylaw or to show that the Board's selection of North Carolina as the exclusive forum was irrational,” it opined.

Enforcement of Bylaw

Moreover, the court held that it was not unreasonable to apply the forum selection bylaw in this case given the circumstances and the lack of Delaware public policy mandating otherwise. It added that its conclusion was supported by judicial comity considerations.

“If Delaware corporations are to expect, after Chevron, that foreign courts will enforce valid bylaws that designate Delaware as the exclusive forum for intra-corporate disputes, then, as a matter of comity, so too should this Court enforce a Delaware corporation's bylaw that does not designate Delaware as the exclusive forum,” the court wrote. “In my opinion, to conclude otherwise would stray too far from the harmony that fundamental principles of judicial comity seek to maintain.”

The city was represented by Christine Azar and Ned Weinberger of Labaton Sucharow LLP, Wilmington, Delaware; Christopher Keller, Eric Belfi and Michael Stocker of Labaton Sucharow, New York; and Jeremy Friedman and Spencer Oster of Friedman Oster PLLC, New York.

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